UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _________________ COMMISSION FILE NUMBER: 1-13447 ANNALY MORTGAGE MANAGEMENT, INC. (Exact name of Registrant as specified in its Charter) MARYLAND 22-3479661 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 12 EAST 41ST STREET, SUITE 700 NEW YORK, NEW YORK (Address of principal executive offices) 10017 (Zip Code) (212) 696-0100 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of stock, as of the last practicable date: Class Outstanding at November 9, 2001 Common Stock, $.01 par value 59,762,511
ANNALY MORTGAGE MANAGEMENT, INC. FORM 10-Q INDEX <TABLE> <CAPTION> <S> <C> Part I. FINANCIAL INFORMATION Item 1. Financial Statements: Statements of Financial Condition- September 30, 2001 (Unaudited) and December 31, 2000 1 Statements of Operations (Unaudited) for the quarters and nine months ended September 30, 2001 and 2000 2 Statements of Stockholders' Equity (Unaudited) for the nine months ended September 30, 2001 3 Statements of Cash Flows (Unaudited) for the quarters and nine months ended September 30, 2001 and 2000 4 Notes to Financial Statements (Unaudited) 5-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-23 Item 3. Quantitative and Qualitative Disclosure about Market Risk 24-25 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 26 SIGNATURES 27 </TABLE>
ANNALY MORTGAGE MANAGEMENT, INC STATEMENTS OF FINANCIAL CONDITION <TABLE> <CAPTION> SEPTEMBER 30, 2001 DECEMBER 31, (UNAUDITED) 2000 --------------- --------------- <S> <C> <C> ASSETS Cash and cash equivalents $ 849,658 $ 113,061 Mortgage-Backed Securities, at fair value 6,428,852,659 1,978,219,376 Receivable for Mortgage-Backed Securities sold 61,977,199 44,933,631 Accrued interest receivable 36,580,296 11,502,482 Other assets 259,330 260,238 --------------- --------------- Total assets $ 6,528,519,142 $ 2,035,028,788 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Repurchase agreements $ 5,521,302,906 $ 1,628,359,000 Payable for Mortgage-Backed Securities purchased 275,430,810 258,798,138 Accrued interest payable 19,784,272 8,314,414 Dividends payable 26,893,130 3,630,745 Other liabilities 1,570,417 -- Accounts payable 1,493,019 284,105 --------------- --------------- Total liabilities 5,846,474,554 1,899,386,402 --------------- --------------- Stockholders' Equity: Common stock: par value $.01 per share; 100,000,000 authorized, 59,755,018 and 14,522,978 shares issued and outstanding, respectively 597,550 145,230 Additional paid-in capital 623,277,645 147,844,861 Accumulated other comprehensive gain (loss) 56,676,820 (13,044,259) Retained earnings 1,492,573 696,554 --------------- --------------- Total stockholders' equity 682,044,588 135,642,386 --------------- --------------- Total liabilities and stockholders' equity $ 6,528,519,142 $ 2,035,028,788 =============== =============== </TABLE> See notes to financial statements 1
ANNALY MORTGAGE MANAGEMENT, INC STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> FOR THE FOR THE QUARTER FOR THE NINE FOR THE NINE QUARTER ENDED ENDED SEPTEMBER MONTHS ENDED MONTHS ENDED SEPTEMBER 30, 30, SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ---------------- ----------------- ----------------- ------------------ <S> <C> <C> <C> <C> INTEREST INCOME: Mortgage-Backed Securities and cash equivalents $ 75,774,532 $ 28,239,125 $ 182,998,604 $ 78,590,427 INTEREST EXPENSE: Repurchase agreements 48,620,332 24,779,096 127,357,375 65,525,066 ---------------- ---------------- ----------------- ------------------ NET INTEREST INCOME 27,154,200 3,460,029 55,641,229 13,065,361 GAIN ON SALE OF MORTGAGE-BACKED SECURITIES 1,184,399 872,949 1,935,813 1,044,576 GENERAL AND ADMINISTRATIVE EXPENSES 1,993,431 526,881 4,306,758 1,616,522 ---------------- ---------------- ----------------- ------------------ NET INCOME 26,345,168 3,806,097 53,270,284 12,493,415 ---------------- ---------------- ----------------- ------------------ OTHER COMPREHENSIVE INCOME Unrealized gain on available- for-sale securities 53,001,163 8,141,933 71,656,892 10,873,992 Less: reclassification adjustment for net gains included in net income (1,184,399) (872,949) (1,935,813) (1,044,576) ---------------- ---------------- ----------------- ------------------ Other comprehensive income 51,816,764 7,268,984 69,721,079 9,829,416 ---------------- ---------------- ----------------- ------------------ COMPREHENSIVE INCOME $ 78,161,932 $ 11,075,081 $ 122,991,363 $ 22,322,831 ================ ================ ================= ================== NET INCOME PER SHARE: Basic $ 0.58 $ 0.27 $ 1.51 $ 0.89 ================ ================ ================= ================== Diluted $ 0.57 $ 0.26 $ 1.49 $ 0.87 ================ ================ ================= ================== AVERAGE NUMBER OF SHARES OUTSTANDING: Basic 45,503,179 14,238,680 35,260,086 13,980,602 ================ ================ ================= ================== Diluted 45,959,693 14,529,142 35,768,890 14,274,552 ================ ================ ================= ================== </TABLE> See notes to financial statements 2
ANNALY MORTGAGE MANAGEMENT, INC STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTMEBER 30, 2001 (UNAUDITED) <TABLE> <CAPTION> COMMON ADDITIONAL STOCK PAID-IN COMPREHENSIVE PAR VALUE CAPITAL INCOME -------------------- ------------------ -------------------- <S> <C> <C> <C> BALANCE, DECEMBER 31, 2000 $145,230 $147,844,861 Net Income $8,330,273 Other comprehensive income: Unrealized net gains on securities, net of reclassification adjustment 16,195,141 -------------------- Comprehensive income $24,525,414 ==================== Exercise of stock options 259 113,973 Proceeds from direct purchase 26 27,601 Proceeds from offerings 111,500 99,172,361 Dividends declared for the quarter ended March 31, 2001, $0.35 per share -------------------- ------------------ BALANCE, MARCH 31, 2001 $257,015 $247,158,796 Net Income $18,594,843 Other comprehensive income: Unrealized net gains on securities, net of reclassification adjustment 1,709,173 -------------------- Comprehensive income $20,304,016 ==================== Exercise of stock options 549 306,532 Proceeds from direct purchase 18 24,285 Proceeds from offering 189,185 195,113,590 Dividends declared for the quarter ended June 30, 2001, $0.40 per share -------------------- ------------------ BALANCE, JUNE 30, 2001 $446,767 $442,603,203 Net Income $26,345,168 Other comprehensive income: Unrealized net gains on securities, net of reclassification adjustment 51,816,765 -------------------- Comprehensive income: $78,161,933 ==================== Exercise of stock options 867 1,195,336 Proceeds from offering 149,916 179,479,106 Dividends declared for the quarter ended September 30, 2001 $0.45 per share -------------------- ------------------ BALANCE, SEPTEMBER 30, 2001 $597,550 $623,277,645 ==================== ================== <CAPTION> OTHER RETAINED COMPREHENSIVE EARNINGS INCOME TOTAL --------------------- ----------------------- ------------------- <S> <C> <C> <C> BALANCE, DECEMBER 31, 2000 $696,554 ($13,044,259) $135,642,386 Net Income 8,330,273 Other comprehensive income: Unrealized net gains on securities, net of reclassification adjustment 16,195,141 Comprehensive income 24,525,414 Exercise of stock options 114,232 Proceeds from direct purchase 27,627 Proceeds from offerings 99,283,861 Dividends declared for the quarter ended March 31, 2001, $0.35 per share (7,710,438) (7,710,438) --------------------- ----------------------- ------------------- BALANCE, MARCH 31, 2001 $1,316,389 $3,150,882 $251,883,082 Net Income 18,594,843 Other comprehensive income: Unrealized net gains on securities, net of reclassification adjustment 1,709,173 Comprehensive income 20,304,016 Exercise of stock options 307,081 Proceeds from direct purchase 24,303 Proceeds from offering 195,302,775 Dividends declared for the quarter ended June 30, 2001, $0.40 per share (17,870,697) (17,870,697) --------------------- ----------------------- ------------------- BALANCE, JUNE 30, 2001 $2,040,535 $4,860,055 $449,950,560 Net Income 26,345,168 Other comprehensive income: Unrealized net gains on securities, net of reclassification adjustment 51,816,765 Comprehensive income: 78,161,933 Exercise of stock options 1,196,203 Proceeds from offering 179,629,022 Dividends declared for the quarter ended September 30, 2001 $0.45 per share (26,893,130) (26,893,130) --------------------- ------------------- BALANCE, SEPTEMBER 30, 2001 $1,492,573 $56,676,820 $682,044,588 ===================== ======================= =================== </TABLE> 3
ANNALY MORTGAGE MANAGEMENT, INC STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> FOR THE QUARTER FOR THE QUARTER FOR THE NINE FOR THE NINE ENDED ENDED MONTHS ENDED MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ---------------- ---------------- ---------------- ---------------- <S> <C> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 26,345,168 $ 3,806,097 $ 53,270,284 $ 12,493,415 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of mortgage premiums and discounts, net 8,685,442 826,937 17,623,231 1,821,548 Gain on sale of Mortgage-Backed Securities (1,184,399) (872,949) (1,935,813) (1,044,576) Market value adjustment on Long-Term Repurchases agreement 445,323 445,323 Increase in accrued interest receivable (4,390,386) (3,167,957) (25,077,814) (3,208,885) (Decrease) increase in other assets (41,939) 80,042 908 30,788 Increase in accrued interest Payable 1,558,240 1,960,976 11,469,858 1,396,250 Increase in other liabilities and accounts payable 686,695 86,367 1,208,914 193,594 ---------------- ---------------- ---------------- ---------------- Net cash provided by operating Activities 32,104,144 2,719,513 57,004,891 11,682,134 ---------------- ---------------- ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Mortgage-Backed Securities (1,924,645,073) (398,401,549) (5,911,153,730) (572,513,360) Proceeds from sale of Mortgage-Backed Securities 183,407,976 174,766,165 532,091,070 263,426,063 Principal payments of Mortgage-Backed Securities 506,300,833 43,138,679 982,052,142 112,862,956 ---------------- ---------------- ---------------- ---------------- Net cash used in investing activities (1,234,936,264) (180,496,705) (4,397,010,518) (196,224,341) ---------------- ---------------- ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from repurchase agreements 13,193,781,000 3,505,042,341 31,869,707,527 10,021,252,841 Principal payments on repurchase Agreements (12,153,169,000) (3,323,778,841) (27,975,638,527) (9,828,603,091) Proceeds from exercise of stock options 1,196,203 1,617,516 146,621 Proceeds from dividend reinvestment and share purchase -- 767,479 51,930 5,667,569 Net Proceeds from offerings 179,629,022 -- 474,215,658 -- Dividends paid (17,870,698) (4,262,403) (29,211,880) (13,880,755) ---------------- ---------------- ---------------- ---------------- Net cash provided by financing activities 1,203,566,527 177,768,576 4,340,742,224 184,583,185 ---------------- ---------------- ---------------- ---------------- Net increase (decrease) in cash and cash equivalents 734,407 (8,616) 736,597 40,978 Cash and cash equivalents, beginning of period 115,251 121,512 113,061 71,918 ---------------- ---------------- ---------------- ---------------- Cash and cash equivalents, end of period $ 849,658 $ 112,896 $ 849,658 $ 112,896 ================ ================ ================ ================ Supplemental disclosure of cash flow Information: Interest paid $ 47,062,092 $ 22,818,120 $ 115,887,517 $ 64,128,816 ================ ================ ================ ================ Noncash financing activities: Net change in unrealized gains on available-for-sale securities $ 51,816,764 $ 7,268,984 $ 69,721,079 $ 9,829,416 ================ ================ ================ ================ Dividends declared, not yet paid $ 26,893,130 $ 3,574,858 $ 26,893,130 $ 3,574,858 ================ ================ ================ ================ </TABLE> See notes to financial statements 4
ANNALY MORTGAGE MANAGEMENT, INC NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001 (UNAUDITED) - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Annaly Mortgage Management, Inc. (the "Company") was incorporated in Maryland on November 25, 1996. The Company commenced its operations of purchasing and managing an investment portfolio of Mortgage-Backed Securities on February 18, 1997, upon receipt of the net proceeds from the private placement of equity capital. An initial public offering was completed on October 14, 1997. A summary of the Company's significant accounting policies follows: BASIS OF PRESENTATION - The accompanying unaudited financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. The interim financial statements for the three and nine month periods are unaudited; however, in the opinion of the Company's management, all adjustments, consisting only of normal recurring accruals, necessary for a fair statement of the results of operations have been included. These unaudited financials statements should be read in conjunction with the audited financial statements included in the Company's Annual Report on form 10-K for the year ended December 31, 2000. The nature of the Company's business is such that the results of any interim period are not necessarily indicative of results for a full year. CASH AND CASH EQUIVALENTS - Cash and cash equivalents includes cash on hand and money market funds. The carrying amounts of cash equivalents approximates their value. MORTGAGE-BACKED SECURITIES - The Company invests primarily in mortgage pass-through certificates, collateralized mortgage obligations and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans (collectively, "Mortgage-Backed Securities"). Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, requires the Company to classify its investments as either trading investments, available-for-sale investments or held-to-maturity investments. Although the Company generally intends to hold most of its Mortgage-Backed Securities until maturity, it may, from time to time, sell any of its Mortgage-Backed Securities as part of its overall management of its balance sheet. Accordingly, this flexibility requires the Company to classify all of its Mortgage-Backed Securities as available-for-sale. All assets classified as available-for-sale are reported at fair value, based on market prices provided by certain dealers who make markets in these financial instruments, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. Unrealized losses on Mortgage-Backed Securities that are considered other than temporary, as measured by the amount of decline in fair value attributable to factors other than temporary, are recognized in income and the cost basis of the Mortgage-Backed Securities is adjusted. There were no such adjustments for the nine months ended September 30, 2001 and the year ended December 31, 2000. Interest income is accrued based on the outstanding principal amount of the Mortgage-Backed Securities and their contractual terms. Premiums and discounts associated with the purchase of the Mortgage-Backed Securities are amortized into interest income over the lives of the securities using the interest method. Mortgage-Backed Securities transactions are recorded on the trade date. Purchases of newly issued securities are recorded when all significant uncertainties regarding the characteristics of the securities are removed, generally shortly before settlement date. Realized gains and losses on Mortgage-Backed Securities transactions are determined on the specific identification basis. 5
CREDIT RISK - At September 30, 2001 and December 31, 2000, the Company had limited its exposure to credit losses on its portfolio of Mortgage-Backed Securities by only purchasing securities issued by Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA"), or Government National Mortgage Association ("GNMA"). The payment of principal and interest on the FHLMC and FNMA Mortgage-Backed Securities are guaranteed by those respective agencies and the payment of principal and interest on the GNMA Mortgage-Backed Securities are backed by the full-faith-and-credit of the U.S. government. At September 30, 2001 and December 31, 2000 all of the Company's Mortgage-Backed Securities have an implied "AAA" rating. INCOME TAXES - The Company has elected to be taxed as a Real Estate Investment Trust ("REIT") and intends to comply with the provisions of the Internal Revenue Code of 1986, as amended (the "Code") with respect thereto. Accordingly, the Company will not be subjected to Federal income tax to the extent of its distributions to shareholders and as long as certain asset, income and stock ownership tests are met. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECENT ACCOUNTING PRONOUNCEMENTS - The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as mended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date for FASB Statement No. 133, and No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, and as interpreted by the FASB and the Derivatives Implementation Group through Statement No. 133, Implementation Issues, as of January 1, 2000. 2. MORTGAGE-BACKED SECURITIES The following table pertains to the Company's Mortgage-Backed Securities classified as available-for-sale as of September 30, 2001, which are carried at their fair value: <TABLE> <CAPTION> FEDERAL HOME LOAN FEDERAL NATIONAL GOVERNMENT NATIONAL TOTAL MORTGAGE-BACKED MORTGAGE CORPORATION MORTGAGE ASSOCIATION MORTGAGE ASSOCIATION SECURITIES ---------------------- ------------------------ ----------------------- ---------------------- <S> <C> <C> <C> <C> Mortgage-Backed Securities, gross $3,277,663,017 $2,911,635,970 $86,202,420 $6,275,501,407 Unamortized discount (1,779,766) (736,201) - (2,515,967) Unamortized premium 46,286,763 51,323,500 1,580,136 99,190,399 ---------------------- ------------------------ ----------------------- ---------------------- Amortized cost 3,322,170,014 2,962,223,269 87,782,556 6,372,175,839 Gross unrealized gains 43,692,732 23,626,395 139,934 67,459,061 Gross unrealized losses (5,340,923) (5,229,927) (211,391) (10,782,241) ---------------------- ------------------------ ----------------------- ---------------------- Estimated fair value $3,360,521,823 $2,980,619,737 $87,711,099 $6,428,852,659 ====================== ======================== ======================= ====================== <CAPTION> AMORTIZED COST GROSS UNREALIZED GAIN GROSS UNREALIZED LOSS ESTIMATED FAIR VALUE ---------------------- ------------------------ ----------------------- ---------------------- <S> <C> <C> <C> <C> Adjustable rate $4,874,854,432 $32,870,251 ($10,782,241) $4,896,942,442 Fixed rate 1,497,321,407 34,588,810 -0- 1,531,910,217 ---------------------- ------------------------ ----------------------- ---------------------- Total $6,372,175,839 $67,459,061 ($10,782,241) $6,428,852,659 ====================== ======================== ======================= ====================== </TABLE> 6
The following table pertains to the Company's Mortgage-Backed Securities classified as available-for-sale as of December 31, 2000, which are carried at their fair value: <TABLE> <CAPTION> TOTAL FEDERAL HOME LOAN FEDERAL NATIONAL GOVERNMENT NATIONAL MORTGAGE-BACKED MORTGAGE CORPORATION MORTGAGE ASSOCIATION MORTGAGE ASSOCIATION SECURITIES ---------------------- ------------------------ ----------------------- ---------------------- <S> <C> <C> <C> <C> Mortgage-Backed Securities, gross $1,029,045,622 $853,777,836 $85,143,889 $1,967,967,347 Unamortized discount (221,944) (767,116) - (989,060) Unamortized premium 11,203,043 11,569,619 1,512,687 24,285,349 ---------------------- ------------------------ ----------------------- ---------------------- Amortized cost 1,040,026,721 864,580,339 86,656,576 1,991,263,636 Gross unrealized gains 2,220,525 798,984 - 3,019,509 Gross unrealized losses (5,426,076) (9,503,333) (1,134,360) (16,063,769) ---------------------- ------------------------ ----------------------- ---------------------- Estimated fair value $1,036,821,170 $855,875,990 $85,522,216 $1,978,219,376 ====================== ======================== ======================= ====================== <CAPTION> AMORTIZED COST GROSS UNREALIZED GAIN GROSS UNREALIZED LOSS ESTIMATED FAIR VALUE ---------------------- ------------------------ ----------------------- ---------------------- <S> <C> <C> <C> <C> Adjustable rate $1,475,409,337 $ 12,565 ($7,819,597) $1,467,602,305 Fixed rate 515,854,299 3,006,944 (8,244,172) 510,617,071 ---------------------- ------------------------ ----------------------- ---------------------- Total $1,991,263,636 $3,019,509 ($16,063,769) $1,978,219,376 ====================== ======================== ======================= ====================== </TABLE> The adjustable rate Mortgage-Backed Securities are limited by periodic caps (generally interest rate adjustments are limited to no more than 1% every six months) and lifetime caps. The weighted average lifetime cap was 11.5% at September 30, 2001 and 11.5% at December 31, 2000. During the nine months ended September 30, 2001, the Company realized $1,935,813 in gains from sales of Mortgage-Backed Securities. During the nine months ended September 30, 2000, the Company realized $1,044,576 in gains from sales of Mortgage-Backed Securities. 3. REPURCHASE AGREEMENTS The Company had outstanding $5,521,302,906 and $1,682,359,000 of repurchase agreements with a weighted average borrowing rate of 3.44% and 6.55% and a weighted average remaining maturity of 74 days and 29 days as of September 30, 2001 and December 31, 2000, respectively. At September 30, 2001 and December 31, 2000, the repurchase agreements had the following remaining maturities: <TABLE> <CAPTION> SEPTEMBER 30, 2001 DECEMBER 31, 2000 --------------------------- --------------------------- <S> <C> <C> Within 30 days $4,402,672,000 $1,135,886,000 30 to 59 days 629,348,000 363,810,000 60 to 89 days - 48,845,000 90 to 119 days 18,202,000 - Over 120 days 471,080,906 79,818,000 --------------------------- --------------------------- Total $5,521,302,906 $1,628,359,000 =========================== =========================== </TABLE> 7
4. OTHER LIABILITIES As of September 30, 2001, the Company had a repurchase agreement with a buyer's right to extend. The buyer may extend this transaction, in whole or in part, on the repurchase date for an additional period of three months. The Buyer will additionally have the right to successively extend this transaction for additional periods of three months, but the final repurchase date will in any case be no later than July 19, 2006. The aggregate fair value was a $1,570,417 liability included in other liabilities on the Statement of Financial Condition. During the quarter, the net change in the fair value was $445,323, which was included in interest expense. 5. COMMON STOCK During the nine months ended September 30, 2001, 167,502 options were exercised or shares granted under the long-term compensation plan totaled $1,196,203. Also, 4,438 shares were purchased in the dividend reinvestment and direct purchase program an aggregate purchase price of $51,931. The Company completed an offering of common stock on September 26, 2001 issuing 14,991,600 shares, with aggregate net proceeds of $179.6 million. An offering of common stock during the second quarter of 2001 was completed issuing 18,918,500 shares, with aggregate net proceeds of $195.3 million. Additional offerings for 11,150,000 shares were completed during the first quarter for aggregate net proceeds of $99.3 million. During the year ended December 31, 2000, the number of stock options exercised was 47,499, with an aggregate purchase price of $198,762. The number of shares issued in the dividend reinvestment and direct purchase plan was 894,163 with an aggregate purchase price of $7,392,859 during the year ended December 31, 2000. During the Company's quarter ending September 30, 2001, the Company declared dividends to shareholders totaling $26,893,130 or $0.45 per share, which was paid on October 30, 2001. During the year ended December 31, 2000, the Company declared dividends to shareholders totaling $16,333,252, or $1.15 per share, of which $12,702,507 was paid during the year and $3,630,745 was paid on January 30, 2001. 6. EARNINGS PER SHARE (EPS) In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting No. 128, Earnings Per Share (SFAS No. 128), which requires dual presentation of basic EPS and diluted EPS on the face of the income statement for all entities with complex capital structures. SFAS No. 128 also requires a reconciliation of the numerator and denominator of basic EPS and diluted EPS computation. For the quarter ended September 30, 2001, the reconciliation is as follows: <TABLE> <CAPTION> For the Quarter Ended September 30, 2001 ------------------------------------------------------------------------ Income Shares (Denominator) Per-Share (Numerator) Amount <S> <C> <C> <C> Net income $26,345,168 ----------------------- Basic earnings per share $26,345,168 45,503,179 $0.58 ======================== Effect of dilutive securities: Dilutive stock options 456,514 ----------------------- ----------------------- Diluted earnings per share $26,345,168 45,959,693 $0.57 ======================= ======================= ======================== </TABLE> 8
For the nine months ended September 30, 2001, the reconciliation is as follows: <TABLE> <CAPTION> For the Nine Months Ended September 30, 2001 ------------------------------------------------------------------------ Income Shares (Denominator) Per-Share (Numerator) Amount <S> <C> <C> <C> Net income $53,270,284 ----------------------- Basic earnings per share $53,270,284 35,260,086 $1.51 ======================== Effect of dilutive securities: Dilutive stock options 508,804 ----------------------- ----------------------- Diluted earnings per share $53,270,284 35,768,890 $1.49 ======================= ======================= ======================== </TABLE> Options to purchase 735,485 shares were outstanding during the quarter ended September 30, 2001 and were dilutive as the exercise price of between $4.00 and $13.69 was less than the average stock price for the quarter of $13.75. Options to purchase 729,235 shares were outstanding during the nine months ended September 30, 2001 and were dilutive as the exercise price of between $4.00 and $11.25 was less than the average stock price for the nine months of $12.18. Options to purchase 6,250 shares of stock were outstanding and not considered dilutive. The exercise price of $13.69 was greater than the average stock price for the nine months of $12.18 For the quarter ended September 30, 2000, the reconciliation is as follows: <TABLE> <CAPTION> For the Quarter Ended September 30, 2000 ----------------------------------------------------------------------------- Income Shares (Denominator) Per-Share (Numerator) Amount <S> <C> <C> <C> Net income $3,806,097 --------------------------- Basic earnings per share $3,806,097 14,238,680 $0.27 ========================= Effect of dilutive securities: Dilutive stock options 290,462 --------------------------- ----------------------- Diluted earnings per share $3,806,097 14,529,142 $0.26 =========================== ======================= ========================= </TABLE> For the nine months ended September 30, 2000, the reconciliation is as follows: <TABLE> <CAPTION> For the Nine Months Ended September 30, 2000 ------------------------------------------------------------------------ Income Shares (Denominator) Per-Share (Numerator) Amount <S> <C> <C> <C> Net income $12,493,415 ----------------------- Basic earnings per share $12,493,415 13,980,602 $0.89 ======================== Effect of dilutive securities: Dilutive stock options 293,950 ----------------------- ----------------------- Diluted earnings per share $12,493,415 14,274,552 $0.87 ======================= ======================= ======================== </TABLE> 9
Options to purchase 346,756 shares were outstanding during the quarter ended September 30, 2000 and dilutive, as the exercise price (between $4.00 and $8.125) was less than the average stock price for the three month period for the Company of $8.62. Options to purchase 452,676 shares of stock were outstanding during the period and are not considered dilutive. The exercise price (between $8.94 and $11.25) was greater than the average stock price for the three month period of $8.62. Options to purchase 346,756 shares were outstanding during the nine months ended September 30, 2000 and dilutive, as the exercise price (between $4.00 and $8.125) was less than the average stock price for the nine month period for the Company of $8.51. Options to purchase 452,676 shares of stock were outstanding during the period and are not considered dilutive. The exercise price (between $8.63 and $11.25) was greater than the average stock price for the three month period of $8.51. 7. COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. Statement No. 130 requires the reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. The Company at September 30, 2001 and December 31, 2000 held securities classified as available-for-sale. At September 30, 2001, the net unrealized gain totaled $56,676,820 and at December 31, 2000, the net unrealized loss totaled $13,044,259. 8. LEASE COMMITMENTS The Corporation has a noncancelable lease for office space, which commenced in April 1998 and expires in December 2007. The Corporation's aggregate future minimum lease payments are as follows: 2001 $97,868 2002 100,515 2003 110,261 2004 113,279 2005 116,388 2006 119,590 2007 122,888 ------------ Total remaining lease payments $780,789 ============ 10. RELATED PARTY TRANSACTION Included in "Other Assets" on the Balance sheet is an investment in Annaly International Money Management, Inc. On June 24, 1998, the Company acquired 99,960 nonvoting shares, at a cost of $49,980. The officers and directors of Annaly International Money Management Inc. are also officers and directors of the Company. 11. INTEREST RATE RISK The primary market risk to the Company is interest rate risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company's control. Changes in the general level of interest rates can affect net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with the interest-bearing liabilities, by affecting the spread between the interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates also can affect the value of the mortgage-backed securities and the Company's ability to realize gains from the sale of these assets. 10
The Company seeks to manage the extent to which net income changes as a function of changes in interest rates by matching adjustable-rate assets with variable-rate borrowings. In addition, although the Company has not done so to date, the Company may seek to mitigate the potential impact on net income of periodic and lifetime coupon adjustment restrictions in the portfolio of mortgage-backed securities by entering into interest rate agreements such as interest rate caps and interest rate swaps. Changes in interest rates may also have an effect on the rate of mortgage principal prepayments and, as a result, prepayments on mortgage-backed securities. The Company will seek to mitigate the effect of changes in the mortgage principal repayment rate by balancing assets purchased at a premium with assets purchased at a discount. To date, the aggregate premium exceeds the aggregate discount on the mortgage-backed securities. As a result, prepayments, which result in the expensing of unamortized premium, will reduce net income compared to what net income would be absent such prepayments. 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are a real estate investment trust that owns and manages a portfolio of mortgage-backed securities. Our principal business objective is to generate net income for distribution to our stockholders from the spread between the interest income on our mortgage-backed securities and the costs of borrowing to finance our acquisition of mortgage-backed securities. RESULTS OF OPERATIONS: FOR THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000 NET INCOME SUMMARY For the quarter ended September 30, 2001, our GAAP net income was $26.3 million, or $0.58 basic earnings per average share, as compared to $3.8 million, or $0.27 basic earnings per average share, for the quarter ended September 30, 2000. We compute our GAAP net income per share by dividing net income by the weighted average number of shares of outstanding common stock during the period, which was 45,503,179 for the quarter ended September 30, 2001 and 14,238,680 for the quarter ended September 30, 2000. Dividends per shares outstanding for the quarter ended September 30, 2001 was $0.45 per share, or $26.9 million in total. Dividends per shares outstanding for the quarter ended September 30, 2000 was $0.25 per share, or $3.6 million in total. Our annualized return on average equity was 23.26% for the quarter ended September 30, 2001 and 13.29% for the quarter ended September 30, 2000. For the nine months ended September 30, 2001, our GAAP net income was $53.3 million, or $1.51 basic earnings per average share, as compared to $12.5 million, or $0.89 basic earnings per average share, for the nine months ended September 30, 2000. We compute our GAAP net income per share by dividing net income by the weighted average number of shares of outstanding common stock during the period, which was 35,260,086 for the nine months ended September 30, 2001 and 13,980,602 for the nine months ended September 30, 2000. Dividends per actual shares outstanding for the nine months ended September 30, 2001 was $1.15 per share, or $52.5 million in total. Our annualized return on average equity was 18.78% for the nine months ended September 30, 2001 and 14.91% for the nine months ended September 30, 2000. NET INCOME SUMMARY (dollars in the thousands, except for per share data) <TABLE> <CAPTION> NINE MONTHS NINE MONTHS QUARTER ENDED QUARTER ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ---------------- ----------------- ---------------- ----------------- <S> <C> <C> <C> <C> Interest Income $75,774 $28,239 $182,998 $78,590 Interest Expense 48,620 24,779 127,357 65,525 ---------------- ----------------- ---------------- ----------------- Net Interest Income 27,154 3,460 55,641 13,065 Gain on Sale of Mortgage-Backed Securities 1,184 873 1,936 1,045 General and Administrative Expenses 1,993 527 4,307 1,617 ---------------- ----------------- ---------------- ----------------- Net Income $26,345 $ 3,806 $53,270 $12,493 ================ ================= ================ ================= Average Number of Basic Shares Outstanding 45,503,179 14,238,680 35,260,086 13,980,602 Average Number of Diluted Shares Outstanding 45,959,693 14,529,142 35,768,890 14,274,552 Basic Net Income Per Share $0.58 $0.27 $1.51 $0.89 Diluted Net Income Per Share $0.57 $0.26 $1.49 $0.87 Average Total Assets $6,069,419 $1,620,094 $4,424,237 $1,569,205 Average Equity $453,104 $114,573 $378,179 $111,755 </TABLE> 12
<TABLE> <CAPTION> <S> <C> <C> <C> <C> Annualized Return on Average Assets 1.74% 0.94% 1.61% 1.06% Annualized Return on Average Equity 23.26% 13.29% 18.78% 14.91% </TABLE> INTEREST INCOME AND AVERAGE EARNING ASSET YIELD We had average earning assets of $5.3 billion and $1.6 billion for the quarters ended September 30, 2001 and 2000, respectively. Our primary source of income for the quarters ended September 30, 2001 and 2000 was interest income. A portion of our income was generated by gains on the sales of our mortgage-backed securities. Our interest income was $75.8 million for the quarter ended September 30, 2001 and $28.2 million for the quarter ended September 30, 2000. Our yield on average earning assets was 5.76% and 7.10% for the same respective periods. Our average earning asset balance increased by $3.7 billion and interest income increased by $47.6 million for the quarter ended September 30, 2001 as compared to the quarter ended September 30, 2000, due to the substantial increase in the asset base resulting from the inflow of capital during the nine months. We had average earning assets of $4.0 billion and $1.5 billion for the nine months ended September 30, 2001 and 2000, respectively. Our interest income was $183.0 million for the nine months ended September 30, 2001 and $78.6 million for the nine months ended September 30, 2000. Our yield on average earning assets was 6.09% and 6.96% for the same respective periods. Our average earning asset balance increased by $2.5 billion and interest income increased by $104.4 million for the nine months ended September 30, 2001 as compared to the nine months ended September 30, 2000, due to equity offerings in the first, second and third quarters. The table below shows our average balance of cash equivalents and mortgage-backed securities, the yields we earned on each type of earning asset, our yield on average earning assets and our interest income for the quarters ended September 30, 2001, June 30, 2001, and March 31, 2001, the year ended December 31, 2000 and the four quarters in 2000. AVERAGE EARNING ASSET YIELD <TABLE> <CAPTION> Yield on Average Yield on Average Yield on Average Mortgage- Average Average Mortgage- Average Cash Backed Earning Cash Backed Earning Interest Equivalents Securities Assets Equivalents Securities Assets Income ----------- ---------- ------ ----------- ---------- ------ ------ (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> For the Quarter Ended September 30, 2001 $2 $5,263,231 $5,263,233 2.77% 5.76% 5.76% $75,774 For the Quarter Ended June 30, 2001 $2 $4,256,864 $4,256,866 3.72% 6.09% 6.09% $64,790 For the Quarter Ended March 31, 2001 $2 $2,502,088 $2,502,090 4.93% 6.78% 6.78% $42,434 - ----------------------------------------------------------------------------------------------------------------------------------- For the Year Ended December 31, 2000 $263 $1,564,228 $1,564,491 4.1.8% 7.02% 7.02% $109,750 For the Quarter Ended December 31, 2000 $394 $1,741,985 $1,742,379 5.08% 7.16% 7.15% $31,160 For the Quarter Ended September 30, 2000 $188 $1,590,497 $1,590,685 5.43% 7.10% 7.10% $28,239 For the Quarter Ended June 30, 2000 $243 $1,476,283 $1,476,526 3.29% 6.97% 6.97% $25,734 For the Quarter Ended March 31, 2000 $226 $1,448,148 $1,448,374 1.79% 6.80% 6.80% $24,617 </TABLE> The constant prepayment rate (or CPR) on our mortgage-backed securities for the quarter ended September 30, 2001 was 25% and for the quarter ended September 30, 2000 was 12%. CPR is an assumed rate of prepayment for our mortgage-backed securities, expressed as an annual rate of prepayment relative to the outstanding principal balance of our mortgage-backed securities. CPR does not purport to be either a historical description of the prepayment experience of our mortgage-backed securities or a prediction of the anticipated rate of prepayment of our mortgage-backed securities. Principal prepayments had a negative effect on our earning asset yield for the quarters and nine months ended September 30, 2001 and 2000 because we adjust our rates of premium amortization and discount accretion monthly based upon the effective yield method, which takes into consideration changes in prepayment speeds. 13
INTEREST EXPENSE AND THE COST OF FUNDS We anticipate that our largest expense will be the cost of borrowed funds. We had average borrowed funds of $5.0 billion and total interest expense of $48.6 million for the quarter ended September 30, 2001. We had average borrowed funds of $1.5 billion and total interest expense of $24.8 million for the quarter ended September 30, 2000. Our average cost of funds was 3.89% for the quarter ended September 30, 2001 and 6.71% for the quarter ended September 30, 2000. The cost of funds rate decreased 282 basis points and the average borrowed funds increased by $3.5 billion for the quarter ended September 30, 2001 when compared to the quarter ended September 30, 2000. Due to the increase of $3.5 billion in the average repurchase balance, interest expense increased by 96%, even though the cost of funds rate declined by 282 basis points. We had average borrowed funds of $3.8 billion and total interest expense of $127.4 million for the nine months ended September 30, 2001. We had average borrowed funds of $1.4 billion and total interest expense of $65.5 million for the nine months ended September 30, 2000. Our average cost of funds was 4.47% for the nine months ended September 30, 2001 and 6.29% for the nine months ended September 30, 2000. The cost of funds rate decreased 182 basis points and the average borrowed funds increased by $2.4 billion for the nine months ended September 30, 2001 when compared to the nine months ended September 30, 2000. With our current asset/liability management strategy, changes in our cost of funds are expected to be closely correlated with changes in short-term LIBOR, although we may choose to extend the maturity of our liabilities at any time. Our average cost of funds was 0.34% above average one-month LIBOR for the quarter ended September 30, 2001 and 0.09% greater than average one-month LIBOR for the quarter ended September 30, 2000. We generally have structured our borrowings to adjust with one-month LIBOR because we believe that one-month LIBOR may continue to be lower than nine-month LIBOR in the present interest rate environment. During the quarter ended September 30, 2001, average one-month LIBOR, was 3.55%, which was 0.08% higher than average six-month LIBOR, which was 3.47%. During the quarter ended September 30, 2000, average one-month LIBOR, was 6.62%, 0.220% lower than average nine-month LIBOR, which was 6.84%. The table below shows our average borrowed funds and average cost of funds as compared to average one-month and average six-month LIBOR for the quarters ended September 30, 2001, June 30, 2001, and March 31, 2001, the year ended December 31, 2000 and the four quarters in 2000. AVERAGE COST OF FUNDS <TABLE> <CAPTION> Average One-Month Average Cost Average Cost LIBOR of Funds of Funds Relative to Relative to Relative to Average Average Average Average Average Average Average Borrowed Interest Cost of One-Month Six-Month Six-Month One-Month Six-Month Funds Expense Funds LIBOR LIBOR LIBOR LIBOR LIBOR ----- ------- ----- ----- ----- ----- ----- ----- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> For the Quarter Ended September 30, 2001 $4,997,922 $48,620 3.89% 3.55% 3.47% 0.08% 0.34% 0.42% For the Quarter Ended June 30, 2001 $4,035,022 $45,284 4.49% 4.27% 4.12% 0.15% 0.22% 0.37% For the Quarter Ended March 31, 2001 $2,355,658 $33,453 5.68% 5.51% 5.18% 0.33% 0.17% 0.50% - -------------------------------------------------------------------------------------------------------------------------------- For the Year Ended December 31, 2000 $1,449,999 $92,902 6.41% 6.41% 6.66% (0.25%) - (0.25%) For the Quarter Ended December 31, 2000 $1,632,564 $27,377 6.71% 6.65% 6.62% 0.03% 0.06% 0.09% For the Quarter Ended September 30, 2000 $1,477,112 $24,779 6.71% 6.62% 6.84% (0.22%) 0.09% (0.13%) For the Quarter Ended June 30, 2000 $1,360,419 $21,453 6.30% 6.46% 6.84% (0.38%) (0.16%) (0.54%) For the Quarter Ended March 31, 2000 $1,329,900 $19,293 5.80% 5.92% 6.32% (0.40%) (0.12%) (0.52%) </TABLE> 14
NET INTEREST RATE AGREEMENT EXPENSE We have not entered into any interest rate agreements to date. As part of our asset/liability management process, we may enter into interest rate agreements such as interest rate caps, floors or swaps. These agreements would be entered into with the intent to reduce interest rate or prepayment risk and would be designed to provide us income and capital appreciation in the event of certain changes in interest rates. However, even after entering into these agreements, we would still be exposed to interest rate and prepayment risks. We review the need for interest rate agreements on a regular basis consistent with our capital investment policy. NET INTEREST INCOME Our net interest income, which equals interest income less interest expense, totaled $27.2 million for the quarter ended September 30, 2001 and $3.5 million for the quarter ended September 30, 2000. Our net interest income increased because of the increased asset size of the company. Our net interest spread, which equals the yield on our average assets for the period less the average cost of funds for the period, was 1.87% for the quarter ended September 30, 2001 as compared to 0.39% for the quarter ended September 30, 2000. This 1.48% increase in spread income is reflected in the increase in net interest income. Net interest margin, which equals net interest income divided by average total assets, was 1.79% on an annualized basis for the quarter ended September 30, 2001 and 0.85% for the quarter ended June 30, 2000. The principal reason that net interest margin exceeded net interest spread is that average interest earning assets exceeded average interest bearing liabilities. A portion of our assets is funded with equity rather than borrowings. We did not have any interest rate agreement expenses to date. Our net interest income, which equals interest income less interest expense, totaled $55.6 million for the nine months ended September 30, 2001 and $13.1 million for the nine months ended September 30, 2000. Our net interest income increased as a direct result of the equity offerings during the nine month ended September 30, 2001. Our net interest spread, which equals the yield on our average assets for the period less the average cost of funds for the period, was 1.62% for the nine months ended September 30, 2001 as compared to 0.65% for the nine months ended September 30, 2000. This 0.77% increase in interest rate spread is reflected in the increase in net interest income. The table below shows our interest income by earning asset type, average earning assets by type, total interest income, interest expense, average repurchase agreements, average cost of funds, and net interest income for the quarters ended September 30, 2001, June 30, 2001, and March 31, 2001, the year ended December 31, 2000, and the four quarters in 2000. 15
GAAP NET INTEREST INCOME <TABLE> <CAPTION> Average Mortgage-Backed Interest Income on Yield on Average Securities Mortgage-Backed Average Cash Total Interest Interest Earning Held Securities Equivalents Income Assets ---- ---------- ----------- ------ ------ (dollars in the thousands) <S> <C> <C> <C> <C> <C> For the Quarter Ended September 30, 2001 $5,263,231 $75,774 $2 $75,774 5.76% For the Quarter Ended June 30, 2001 $4,256,864 $64,790 $2 $64,790 6.09% For the Quarter Ended March 31, 2001 $2,502,088 $42,434 $2 $42,434 6.78% - --------------------------------------------------------------------------------------------------------------------------- For the Year Ended December 31, 2000 $1,564,228 $109,739 $263 $109,750 7.02% For the Quarter Ended December 31, 2000 $1,741,985 $31,154 $394 $31,160 7.16% For the Quarter Ended September 30, 2000 $1,590,497 $28,237 $188 $28,239 7.10% For the Quarter Ended June 30, 2000 $1,476,283 $25,732 $243 $25,734 6.97% For the Quarter Ended March 31, 2000 $1,448,148 $24,616 $226 $24,617 6.80% <CAPTION> Average Net Average Balance of Interest Cost of Interest Repurchase Agreements Expense Funds Income --------------------- ------- ----- ------ <S> <C> <C> <C> <C> For the Quarter Ended September 30, 2001 $4,997,922 $48,620 3.89% $27,154 For the Quarter Ended June 30, 2001 $4,035,022 $45,284 4.49% $19,506 For the Quarter Ended March 31, 2001 $2,355,658 $33,453 5.68% $8,981 - --------------------------------------------------------------------------------------------- For the Year Ended December 31, 2000 $1,449,999 $92,902 6.41% $16,848 For the Quarter Ended December 31, 2000 $1,632,564 $27,377 6.71% $3,783 For the Quarter Ended September 30, 2000 $1,447,112 $24,779 6.71% $3,460 For the Quarter Ended June 30, 2000 $1,360,419 $21,453 6.30% $4,282 For the Quarter Ended March 31, 2000 $1,329,900 $19,293 5.80% $5,323 </TABLE> GAINS AND LOSSES ON SALES OF MORTGAGE-BACKED SECURITIES For the quarter ended September 30, 2001, we sold mortgage-backed securities with an aggregate historical amortized cost of $182.2 million for an aggregate gain of $1.2 million. For the quarter ended September 30, 2000, we sold mortgage-backed securities with an aggregate historical amortized cost of $174.0 million for an aggregate gain of $872,949. For the nine months ended September 30, 2001, we sold mortgage-backed securities with an aggregate historical amortized cost of $530.1 million for an aggregate gain of $1.9 million. For the nine months ended September 30, 2000, we sold mortgage-backed securities with an aggregate historical amortized cost of $262.4 million for an aggregate gain of $1.0 million. The difference between the sale price and the historical amortized cost of our mortgage-backed securities is a realized gain and increases income accordingly. We do not expect to sell assets on a frequent basis, but may from time to time sell existing assets to move into new assets, which our management believes might have higher risk-adjusted returns, or to manage our balance sheet as part of our asset/liability management strategy. CREDIT LOSSES We have not experienced credit losses on our mortgage-backed securities to date. We have limited our exposure to credit losses on our mortgage-backed securities by purchasing only securities, issued or guaranteed by FNMA, FHLMC or GNMA, which, although not rated, carry an implied "AAA" rating. GENERAL AND ADMINISTRATIVE EXPENSES G&A expenses were $2.0 million for the quarter ended September 30, 2001 and $526,881 for the quarter ended September 30, 2000. G&A expenses as a percentage of average assets was 0.13% on an annualized basis for the both quarters ended September 30, 2001 and 2000, respectively. The Company is internally managed and continues to be a low cost provider. G&A expenses were $4.3 million for the nine months ended September 30, 2001 and $1.6 million for the nine months ended September 30, 2000. Due to the increase in average assets, Annaly is able to take advantage of economies of scale. Even though G&A expenses increased for the quarter and the nine months ended September 30, 2001, when compared to the quarter and nine months ended September 30, 2000, G&A as a percentage of average assets remained unchanged. 16
GAAP G&A EXPENSES AND OPERATING EXPENSE RATIOS <TABLE> <CAPTION> Total G&A Total G&A Expenses/Average Expenses/Average Total G&A Assets Equity Expenses (annualized) (annualized) -------- ------------ ------------ (dollars in the thousands) <S> <C> <C> <C> For the Quarter Ended September 30, 2001 $1,993 0.13% 1.76% For the Quarter Ended June 30, 2001 $1,393 0.12% 1.44% For the Quarter Ended March 31, 2001 $921 0.13% 1.90% - ---------------------------------------------------------------------------- For the Year Ended December 31, 2000 $2,286 0.14% 1.94% For the Quarter Ended December 31, 2000 $670 0.14% 2.11% For the Quarter Ended September 30, 2000 $527 0.13% 1.84% For the Quarter Ended June 30, 2000 $507 0.15% 1.85% For the Quarter Ended March 31, 2000 $582 0.16% 2.19% </TABLE> NET INCOME AND RETURN ON AVERAGE EQUITY Our net income was $26.3 million for the quarter ended September 30, 2001 and $3.8 million for the quarter ended September 30, 2000. Our return on average equity was 23.3% for the quarter ended September 30, 2001 and 13.3% for the quarter ended September 30, 2000. Our net income was $53.3 million for the nine months ended September 30, 2001 and $12.5 million for the nine months ended September 30, 2000. Our return on average equity was 18.8% for the nine months ended September 30, 2001 and 14.9% for the nine months ended September 30, 2000. The increase in net income is a direct result of the increase in capital from the offerings completed in the first , second and third quarters of 2001. As previously mentioned, the new capital allowed us to grow the balance sheet and ultimately grow earnings. The table below shows our net interest income, gain on sale of mortgage-backed securities and G&A expenses each as a percentage of average equity, and the return on average equity for the quarters ended September 30, 2001, June 30, 2001, and March 31, 2001, the year ended December 31, 2000, and for the four quarters in 2000. COMPONENTS OF RETURN ON AVERAGE EQUITY -------------------------------------- (RATIOS FOR ALL QUARTERS ARE ANNUALIZED) <TABLE> <CAPTION> Gain on Sale of Net Interest Mortgage-Backed G&A Return on Income/Average Securities/Average Expenses/Average Average Equity Equity Equity Equity ------ ------ ------ ------ <S> <C> <C> <C> <C> For the Quarter Ended September 30, 2001 23.97% 1.05% 1.76% 23.26% For the Quarter Ended June 30, 2001 20.37% 0.50% 1.45% 19.42% For the Quarter Ended March 31, 2001 18.54% 0.56% 1.90% 17.20% - ---------------------------------------------------------------------------------------------------------------- For the Year Ended December 31, 2000 14.31% 1.72% 1.94% 14.09% For the Quarter Ended December 31, 2000 11.90% 3.09% 2.11% 12.88% For the Quarter Ended September 30, 2000 12.08% 3.05% 1.84% 13.29% For the Quarter Ended June 30, 2000 15.61% 0.24% 1.85% 14.00% For the Quarter Ended March 31, 2000 20.07% 0.40% 2.19% 18.28% </TABLE> 17
FINANCIAL CONDITION MORTGAGE-BACKED SECURITIES All of our mortgage-backed securities at September 30, 2001 were adjustable-rate or fixed-rate mortgage-backed securities backed by single-family mortgage loans. All of the mortgage assets underlying these mortgage-backed securities were secured with a first lien position on the underlying single-family properties. All our mortgage-backed securities were FHLMC, FNMA or GNMA mortgage pass-through certificates or CMOs, which carry an implied "AAA" rating. We mark-to-market all of our earning assets at liquidation value. We accrete discount balances as an increase in interest income over the life of discount mortgage-backed securities and we amortize premium balances as a decrease in interest income over the life of premium mortgage-backed securities. At September 30, 2001 and December 31, 2000, we had on our balance sheet a total of $2.5 million and $1.0 million respectively, of unamortized discount (which is the difference between the remaining principal value and current historical amortized cost of our mortgage-backed securities acquired at a price below principal value) and a total of $99.2 million and $24.3 million, respectively, of unamortized premium (which is the difference between the remaining principal value and the current historical amortized cost of our mortgage-backed securities acquired at a price above principal value). We received mortgage principal repayments of $506.3 million for the quarter ended September 30, 2001 and $43.1 million for the quarter ended September 30, 2000. Given our current portfolio composition, if mortgage principal prepayment rates were to increase over the life of our mortgage-backed securities, all other factors being equal, our net interest income would decrease during the life of these mortgage-backed securities as we would be required to amortize our net premium balance into income over a shorter time period. Similarly, if mortgage principal prepayment rates were to decrease over the life of our mortgage-backed securities, all other factors being equal, our net interest income would increase during the life of these mortgage-backed securities, as we would amortize our net premium balance over a longer time period. The table below summarizes our mortgage-backed securities at September 30, 2001, June 30, 2001 and March 31, 2001, December 31, 2000, September 30, 2000, June 30, 2000, and March 31, 2000. MORTGAGE-BACKED SECURITIES -------------------------- <TABLE> <CAPTION> Estimated Amortized Fair Weighted Net Amortized Cost/Principal Estimated Value/Principal Average Principal Value Premium Cost Value Fair Value Value Yield --------------- ------- ---- ----- ---------- ----- ------- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> At September 30, 2001 $6,275,501 $96,674 $6,372,175 101.54% $6,428,853 102.44% 5.17% At June 30, 2001 $5,498,235 $69,193 $5,567,428 101.26% $5,572,288 101.34% 5.75% At March 31, 2001 $3,455,436 $42,023 $3,497,459 101.22% $3,500,610 101.31% 6.43% - --------------------------------------------------------------------------------------------------------------------------- At December 31, 2000 $1,967,967 $23,296 $1,991,263 101.18% $1,978,219 100.52% 7.09% At September 30, 2000 $1,669,997 $21,878 $1,691,875 101.31% $1,664,136 99.65% 7.23% At June 30, 2000 $1,464,968 $20,893 $1,485,861 101.43% $1,450,853 99.04% 7.32% At March 31, 2000 $1,448,875 $21,826 $1,470,701 101.51% $1,436,389 99.14% 7.02% </TABLE> The tables below set forth certain characteristics of our mortgage-backed securities. The index level for adjustable-rate mortgage-backed securities is the weighted average rate of the various short-term interest rate indices, which determine the coupon rate. 18
ADJUSTABLE-RATE MORTGAGE-BACKED SECURITY CHARACTERISTICS -------------------------------------------------------- <TABLE> <CAPTION> Weighted Principal Value Weighted Average Weighted at Period End Average Weighted Weighted Term to Weighted Average as % of Total Principal Coupon Average Average Net Next Average Asset Mortgage-Backed Value Rate Index Level Margin Adjustment Lifetime Cap Yield Securities ----- ---- ----------- ------ ---------- ------------ ----- ---------- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> At September 30, 2001 $4,789,570 6.24% 4.31% 1.93% 27 months 11.46% 4.76% 76.32% At June 30, 2001 $3,997,580 6.47% 4.60% 1.87% 26 months 11.37% 5.38% 72.71% At March 31, 2001 $2,495,296 7.01% 5.14% 1.87% 26 months 11.57% 6.35% 72.21% - ---------------------------------------------------------------------------------------------------------------------------------- At December 31, 2000 $1,454,356 7.61% 5.76% 1.85% 15 months 11.47% 7.24% 73.90% At September 30, 2000 $1,203,268 7.64% 5.93% 1.71% 13 months 11.01% 7.36% 72.05% At June 30, 2000 $986,046 7.53% 6.02% 1.51% 9 months 10.41% 7.46% 67.31% At March 31, 2000 $957,419 7.18% 5.63% 1.55% 10 months 10.59% 7.06% 66.08% </TABLE> FIXED-RATE MORTGAGE-BACKED SECURITY CHARACTERISTICS --------------------------------------------------- <TABLE> <CAPTION> Principal Value Weighted Weighted as % of Total Average Coupon Average Mortgage-Backed Principal Value Rate Asset Yield Securities --------------- ---- ----------- ---------- (dollars in thousands) <S> <C> <C> <C> <C> At September 30, 2001 $1,485,931 6.88% 6.48% 23.68% At June 30, 2001 $1,500,655 6.83% 6.71% 27.29% At March 31, 2001 $960,140 6.79% 6.69% 27.79% - ------------------------- ---------------- ---------------- -------------- ------------------ At December 31, 2000 $513,611 6.62% 6.68% 26.10% At September 30, 2000 $466,729 6.58% 6.92% 27.95% At June 30, 2000 $478,922 6.58% 7.05% 32.69% At March 31, 2000 $491,456 6.58% 7.04% 33.92% </TABLE> At September 30, 2001 and December 31, 2000 we held mortgage-backed securities with coupons linked to the one-year, three-year, and five-year Treasury indices, one-month LIBOR, 12 month cumulative average one-year treasury, and the six-month CD rate. ADJUSTABLE-RATE MORTGAGE-BACKED SECURITIES BY INDEX --------------------------------------------------- SEPTEMBER 30, 2001 ------------------ <TABLE> <CAPTION> 12 Month Cumulative 1-Year 3-Year 5-Year One-Month Six-Month Ave. 1-Year Treasury Treasury Treasury LIBOR CD Rate Treasury Index Index Index ----- ------- -------- ----- ----- ----- <S> <C> <C> <C> <C> <C> <C> Weighted Average Adjustment Frequency 1 mo. 6 mo. 1 mo. 12 mo. 36 mo. 60 mo. Weighted Average Term to Next Adjustment 1 mo. 1 mo. 1 mo. 37 mo. 14 mo. 33 mo. Weighted Average Annual Period Cap None 1.00% None 1.98% 2.00% 1.79% Weighted Average Lifetime Cap at September 30, 2001 9.07% 11.38% 10.63% 12.26% 12.93% 12.44% Mortgage Principal Value as Percentage of Mortgage-Backed Securities at September 30, 2001 18.68% 0.29% 1.33% 54.11% 1.65% 0.25% </TABLE> 19
ADJUSTABLE-RATE MORTGAGE-BACKED SECURITIES BY INDEX --------------------------------------------------- DECEMBER 31, 2000 ----------------- <TABLE> <CAPTION> 1-Year 3-Year 5-Year One-Month Six-Month Treasury Treasury Treasury LIBOR CD Rate Index Index Index ----- ------- ----- ----- ----- <S> <C> <C> <C> <C> <C> Weighted Average Adjustment Frequency 1 mo. 6 mo. 12 mo. 36 mo. 60 mo. Weighted Average Term to Next Adjustment 1 mo. 2 mo. 23 mo. 20 mo. 40 mo. Weighted Average Annual Period Cap None 1.00% 1.98% 2.00% 1.76% Weighted Average Lifetime Cap at December 31, 2000 9.11% 11.37% 12.61% 13.24% 12.42% Mortgage Principal Value as Percentage of Mortgage-Backed Securities at December 31, 2000 24.08% 1.21%% 44.52% 2.97% 1.12% </TABLE> INTEREST RATE AGREEMENTS Interest rate agreements are assets that are carried on a balance sheet at estimated liquidation value. We have not entered into any interest rate agreements since our inception. BORROWINGS To date, our debt has consisted entirely of borrowings collateralized by a pledge of our mortgage-backed securities. These borrowings appear on our balance sheet as repurchase agreements. At September 30, 2001, we had established uncommitted borrowing facilities in this market with twenty lenders in amounts, which we believe, are in excess of our needs. All of our mortgage-backed securities are currently accepted as collateral for these borrowings. However, we limit our borrowings, and thus our potential asset growth, in order to maintain unused borrowing capacity and thus increase the liquidity and strength of our balance sheet. For the quarter ended September 30, 2001 the term to maturity of our borrowings ranged from one day to three years, with a weighted average original term to maturity of 112 days. At September 30, 2001, the weighted average cost of funds for all of our borrowings was 3.44% and the weighted average term to next rate adjustment was 74 days. At September 30, 2000, the term to maturity ranged from one day to 3 months, with a weighted average original term of 46 days. The weighted average cost of funds for all of our borrowings 6.57% and weighted average term to the next adjustment was 18 days. LIQUIDITY Liquidity, which is our ability to turn non-cash assets into cash, allows us to purchase additional mortgage-backed securities and to pledge additional assets to secure existing borrowings should the value of our pledged assets decline. Potential immediate sources of liquidity for us include cash balances and unused borrowing capacity. Unused borrowing capacity will vary over time as the market value of our mortgage-backed securities varies. Our balance sheet also generates liquidity on an on-going basis through mortgage principal repayments and net earnings held prior to payment as dividends. Should our needs ever exceed these on-going sources of liquidity plus the immediate sources of liquidity discussed above, we believe that our mortgage-backed securities could in most circumstances be sold to raise cash. The maintenance of liquidity is one of the goals of our capital investment policy. Under this policy, we limit asset growth in order to preserve unused borrowing capacity for liquidity management purposes. STOCKHOLDERS' EQUITY We use "available-for-sale" treatment for our mortgage-backed securities; we carry these assets on our balance sheet at estimated market value rather than historical amortized cost. Based upon this "available-for-sale" treatment, our equity base at September 30, 2001 was $682.0 million, or $11.41 per share. If we had used historical amortized cost accounting, our equity base at September 30, 2001 would have been $625.4 million, or $10.47 per share. Our equity base at September 30, 2000 was $118.7 million, or $8.30 per share. If we had used historical 20
amortized cost accounting, our equity base at September 30, 2000 would have been $146.4 million, or $10.24 per share. During the quarter ended September 30, 2001, the Company raised $179.6 in a secondary offering. For the nine months ended September 30, 2001, the Company raised a total of $474.2 million in capital. With our "available-for-sale" accounting treatment, unrealized fluctuations in market values of assets do not impact our GAAP or taxable income but rather are reflected on our balance sheet by changing the carrying value of the asset and stockholders' equity under "Accumulated Other Comprehensive Income (Loss)." By accounting for our assets in this manner, we hope to provide useful information to stockholders and creditors and to preserve flexibility to sell assets in the future without having to change accounting methods. As a result of this mark-to-market accounting treatment, our book value and book value per share are likely to fluctuate far more than if we used historical amortized cost accounting. As a result, comparisons with companies that use historical cost accounting for some or all of their balance sheet may not be meaningful. The table below shows unrealized gains and losses on the mortgage-backed securities in our portfolio. UNREALIZED GAINS AND LOSSES --------------------------- (Dollars in thousands) <TABLE> <CAPTION> At September At At At 30, June 30, March 31, December 31, 2001 2001 2001 2000 ---------------- -------------- ------------------ --------------- <S> <C> <C> <C> <C> Unrealized Gain $67,459 $19,322 $12,606 $ 3,020 Unrealized Loss (10,782) (14,462) (9,455) (16,064) ---------------- -------------- ------------------ --------------- Net Unrealized Gain (Loss) $56,677 $4,860 $3,151 ($13,044) ================ ============== ================== =============== Net Unrealized Gain (Loss) as % of Mortgage- Backed Securities Principal Value 0.90% 0.08% 0.09% (0.66%) Net Unrealized Gain (Loss) as % of Mortgage- Backed Securities Amortized Cost 0.90% 0.08% 0.09% (0.66%) </TABLE> Unrealized changes in the estimated net market value of mortgage-backed securities have one direct effect on our potential earnings and dividends: positive market-to-market changes increase our equity base and allow us to increase our borrowing capacity while negative changes tend to limit borrowing capacity under our capital investment policy. A very large negative change in the net market value of our mortgage-backed securities might impair our liquidity position, requiring us to sell assets with the likely result of realized losses upon sale. "Unrealized Gains on Available for Sale Securities" was $56.7 million, or 0.90% of the amortized cost of our mortgage-backed securities at September 30, 2001. "Unrealized Losses on Available for Sale Securities" was $13.0 million or 0.66% of the amortized cost of our mortgage-backed securities at December 31, 2000. The table below shows our equity capital base as reported and on a historical amortized cost basis at September 30, 2001, June 30, 2001, March 31, 2001, December 31, 2000, September 30, 2000, June 30, 2000 and March 31, 2000. Issuances of common stock, the level of GAAP earnings as compared to dividends declared, and other factors influence our historical cost equity capital base. The GAAP reported equity capital base is influenced by these factors plus changes in the "Net Unrealized Losses on Assets Available for Sale" account. 21
STOCKHOLDERS' EQUITY -------------------- <TABLE> <CAPTION> Net Unrealized Historical Historical Gains (Losses) on GAAP Reported Amortized Cost GAAP Reported Amortized Cost Assets Available Equity Base Equity Per Equity (Book Equity Base for Sale (Book Value) Share Value) Per Share ----------- -------- ------------ ----- ---------------- (dollars in thousands, except per share data) <S> <C> <C> <C> <C> <C> At September 30, 2001 $625,368 $56,677 $682,045 $10.47 $11.41 At June 30, 2001 $445,091 $4,860 $449,951 $9.96 $10.07 At March 31, 2001 $248,732 $3,151 $251,883 $9.67 $ 9.80 - -------------------------------------------------------------------------------------------------------------- At December 31, 2000 $148,686 ($13,044) $135,642 $10.24 $9.34 At September 30, 2000 $146,446 ($27,739) $118,707 $10.24 $8.30 At June 30, 2000 $145,448 ($35,008) $110,440 $10.24 $7.77 At March 31, 2000 $143,279 ($34,313) $108,966 $10.31 $7.84 </TABLE> LEVERAGE Our debt-to-GAAP reported equity ratio at September 30, 2001 and, 2000 was 8.1:1 and 12.9:1, respectively. We generally expect to maintain a ratio of debt-to-equity of between 8:1 and 12:1, although the ratio may vary from this range from time to time based upon various factors, including our management's opinion of the level of risk of our assets and liabilities, our liquidity position, our level of unused borrowing capacity and over-collateralization levels required by lenders when we pledge assets to secure borrowings. Our target debt-to-GAAP reported equity ratio is determined under our capital investment policy. Should our actual debt-to-equity ratio increase above the target level due to asset acquisition or market value fluctuations in assets, we will cease to acquire new assets. Our management will, at that time, present a plan to our Board of Directors to bring us back to our target debt-to-equity ratio; in many circumstances, this would be accomplished in time by the monthly reduction of the balance of our mortgage-backed securities through principal repayments. ASSET/LIABILITY MANAGEMENT AND EFFECT OF CHANGES IN INTEREST RATES We continually review our asset/liability management strategy with respect to interest rate risk, mortgage prepayment risk, credit risk and the related issues of capital adequacy and liquidity. We seek attractive risk-adjusted stockholder returns while maintaining a strong balance sheet. We seek to manage the extent to which our net income changes as a function of changes in interest rates by matching adjustable-rate assets with variable-rate borrowings. In addition, although we have not done so to date, we may seek to mitigate the potential impact on net income of periodic and lifetime coupon adjustment restrictions in our portfolio of mortgage-backed securities by entering into interest rate agreements such as interest rate caps and interest rate swaps. Changes in interest rates may also have an effect on the rate of mortgage principal prepayments and, as a result, prepayments on mortgage-backed securities. We will seek to mitigate the effect of changes in the mortgage principal repayment rate by balancing assets we purchase at a premium with assets we purchase at a discount. To date, the aggregate premium exceeds the aggregate discount on our mortgage-backed securities. As a result, prepayments, which result in the expensing of unamortized premium, will reduce our net income compared to what net income would be absent such prepayments. 22
INFLATION Virtually all of our assets and liabilities are financial in nature. As a result, interest rates and other factors drive our performance far more than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our dividends based upon our net income as calculated for tax purposes; in each case, our activities and balance sheet are measured with reference to historical cost or fair market value without considering inflation. OTHER MATTERS We calculate that our qualified REIT assets, as defined in the Internal Revenue Code, are 99.4% of our total assets at September 30, 2001 and 2000, as compared to the Internal Revenue Code requirement that at least 75% of our total assets be qualified REIT assets. We also calculate that 100% of our revenue qualifies for the 75% source of income test and for the 95% source of income test, under the REIT rules for the years ended September 30, 2001 and 2000. We also met all REIT requirements regarding the ownership of our common stock and the distribution of our net income. Therefore, as of September 30, 2001 and 2000, we believe that we qualified as a REIT under the Internal Revenue Code. We at all times intend to conduct our business so as not to become regulated as an investment company under the Investment Company Act. If we were to become regulated as an investment company, then our use of leverage would be substantially reduced. The Investment Company Act exempts entities that are "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate" (qualifying interests). Under current interpretation of the staff of the SEC, in order to qualify for this exemption, we must maintain at least 55% of our assets directly in qualifying interests. In addition, unless certain mortgage securitites represent all the certificates issued with respect to an underlying pool of mortgages, the mortgage-backed securities may be treated as securities separate from the underlying mortgage loans and, thus, may not be considered qualifying interests for purposes of the 55% requirement. We calculate that as of September 30, 2001 and 2000 we were in compliance with this requirement. 23
ITEM. 3 QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we are exposed is interest rate risk, which is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities, by affecting the spread between our interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates also can affect the value of our mortgage-backed securities and our ability to realize gains from the sale of these assets. We may utilize a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts, in order to limit the effects of interest rates on our operations. If we use these types of derivatives to hedge the risk of interest-earning assets or interest-bearing liabilities, we may be subject to certain risks, including the risk that losses on a hedge position will reduce the funds available for payments to holders of securities and that the losses may exceed the amount we invested in the instruments. To date, we have not purchased any hedging instruments. Our profitability and the value of our portfolio may be adversely affected during any period as a result of changing interest rates. The following table quantifies the potential changes in net interest income and portfolio value should interest rates go up or down 200 basis points, assuming the yield curves of the rate shocks will be parallel to each other and the current yield curve. All changes in income and value are measured as percentage changes from the projected net interest income and portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at September 30, 2001 and various estimates regarding prepayment and all activities are made at each level of rate shock. Actual results could differ significantly from these estimates. <TABLE> <CAPTION> Projected Percentage Change in Projected Percentage Change in Change in Interest Rate Net Interest Income Portfolio Value - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> - -200 Basis Points 16% 2% - -100 Basis Points 8% 1% - -50 Basis Points 4% 1% Base Interest Rate +50 Basis Points (7%) (1%) +100 Basis Points (15%) (2%) +200 Basis Points (32%) (6%) </TABLE> ASSET AND LIABILITY MANAGEMENT Asset and liability management is concerned with the timing and magnitude of the repricing of assets and liabilities. We attempt to control risks associated with interest rate movements. Methods for evaluating interest rate risk include an analysis of our interest rate sensitivity "gap", which is the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds interest-rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest 24
income positively or negatively even if an institution were perfectly matched in each maturity category. The following table sets forth the estimated maturity or repricing of our interest-earning assets and interest-bearing liabilities at September 30, 2001. The amounts of assets and liabilities shown within a particular period were determined in accordance with the contractual terms of the assets and liabilities, except adjustable-rate loans, and securities are included in the period in which their interest rates are first scheduled to adjust and not in the period in which they mature. Mortgage-backed securities reflect estimated prepayments that were estimated based on analyses of broker estimates, the results of a prepayment model that we utilized and empirical data. Our management believes that these assumptions approximate actual experience and considers them reasonable; however, the interest rate sensitivity of our assets and liabilities in the table could vary substantially if different assumptions were used or actual experience differs from the historical experience on which the assumptions are based. (IN THOUSANDS) <TABLE> <CAPTION> More than 1 3 Years and Within 3 Months 4-12 Months Year to 3 Years Over Total ---------------- ----------------- ---------------- ---------------- -------------- (in thousands) <S> <C> <C> <C> <C> <C> Rate Sensitive Assets: Mortgage-Backed Securities $1,280,975 $345,081 $1,098,769 $3,550,677 $6,275,502 Rate Sensitive Liabilities: Repurchase Agreements 5,032,020 18,202 471,081 5,521,303 ---------------- ----------------- ---------------- ---------------- -------------- Interest rate sensitivity gap ($3,751,045) $326,879 $627,688 $3,550,677 $754,199 ================ ================= ================ ================ ============== Cumulative rate sensitivity gap ($3,751,045) ($3,424,166) ($2,796,478) $754,199 ================ ================= ================ ================ ============== Cumulative interest rate sensitivity gap as a percentage of total rate-sensitive assets (60%) (55%) (45%) 12% </TABLE> Our analysis of risks is based on management's experience, estimates, models and assumptions. These analyses rely on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of investment decisions by our management may produce results that differ significantly form the estimates and assumptions used in our models and the projected results shown in the above tables and in this report. These analyses contain certain forward-looking statements and are subject to the safe harbor statement set forth under the heading, "Special Note Regarding Forward-Looking Statements." 25
PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K The Company filed a Form 8-K on August 29, 2001 with respect to Deloitte and Touche LLC consent to use their name and incorporate by reference the 2000 Form 10K in the prospectus supplement. The Company filed a Form 8-K on September 21, 2001 with respect to press release announcing the dividend resolution. The following current report on Form 8-K was filed by the Company subsequent to the third quarter 2001: The Company filed a Form 8-K on October 2, 2001 with respect to the Company's entering into an underwriting agreement with UBS Warburg LLC. 26
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ANNALY MORTGAGE MANAGEMENT, INC. Dated: November 13, 2001 By: /s/ Michael A.J. Farrell ------------------------ Michael A.J. Farrell Chairman of the Board and Chief Executive Officer (authorized officer of registrant) Dated: November 13, 2001 By: /s/ Kathryn F. Fagan --------------------- Kathryn F. Fagan Chief Financial Officer and Treasurer (principal accounting officer) 27